The Worst Week of 2019

March 9, 2019

The first shoe dropped…

Monday morning brought news that a trade deal with China was nearing, causing stocks to rally. However, given most investors believed a resolution to already be priced into the market, they took advantage of these elevated prices to cash in some of their gains, and this sell-off brought stocks right back down again. While the markets are already expecting a trade deal by the end of March, there is still a significant amount of uncertainty around the details and, therefore, true impact on the economy. Reaching a deal itself is important, but the bigger concern for the US (and others around the world) is going to be the ability to actually enforce the deal and send China to detention for breaking the rules.

Moral of the story: It seems like the market has already priced in some form of an agreement being reached by the end of March and any incremental positive chatter will only create temporary lifts in the market. Until we have a deal that is signed, sealed, and delivered, stocks won’t be able to rally in a sustainable way.

The second shoe dropped…

Despite the Trump administration’s protectionist policies the US trade deficit reached a 10-year high because of slowing global growth and a stronger dollar driving down demand for US goods. This news was followed by the ECB slashing its growth estimates from 1.7% (as of December) to 1.1% and announcing additional stimulus for the European economy. Then we learned productivity grew 1.3% in 2018, which was only slightly better than the growth we saw in 2017. In the last cycle (2000-2007) productivity increased by 2.7% on average but has managed to average only 1.3% since then. Given GDP growth is driven by growth in the labor force and growth in productivity, it seems unlikely for the Trump administration to deliver on its promise of 3% GDP growth without additional gains in productivity.

Moral of the story: Trade (exports minus imports) is part of GDP and this deficit number is likely to generate a downward revision to the initial GDP estimates of fourth quarter (2.6%) and full year (2.9%), respectively. Additionally, pressures on all fronts are making the outlook for growth in the first quarter of 2019 to be fairly grim. Stocks continued to slide through the week on these worries.

And closing out the week…barefoot and shirtless.

Friday morning brought arguably the most anticipated economic data point of the week – the February jobs report – and to say it was underwhelming would be a serious understatement. According to this report, job growth came to a grinding halt as we only saw 20k new jobs, compared to the 180k expected by the market. While job growth was largely expected slow coming off its very high levels recently, this is just painful. To be fair this report could have some noise (government shutdown, bad weather impacting construction jobs), so it’s probably best to wait for next month’s report before crying wolf. The report did include some good news, though, as the unemployment rate ticked down slightly and the tighter labor market led to 3.4% wage growth, which was higher than expected.

Moral of the story: The labor market has been an anomalous source of strength in terms of economic indicators, as most other measures have been showing some serious weakness. The headline jobs number on Friday, however, was a big step backward on the jobs front and caused the market to post its fifth straight decline and close out the worst week of 2019.